Tuesday, October 23, 2018

Why PF?

Why to Invest in PF ?

To be frank, most of us, especially the salaried, PF gets done by the company where you work. Government has now made it compulsory, for companies to provide Provident Fund  for all employees.

The good part about PF, is that one doesn't have to do it manually. Its mostly deducted from your salary and invested in your PF account.  Normally, its 12% of your basic component which you invest and 10% is paid by the Company. The best part of this investment is the Interest Rate and the power of compounding which acts on this investment

Even if your Basic Salary is 15,000/- INR, then your PF will be 1800/- from your side and 1500/- from the company, each month. That adds up to 3300/- per month. Though your salary would increase every year, I will still consider the same amount for 40 years of your working life and see how it adds up.

Use a compound Interest Calculator and you will realise that the amount comes to 10,657,413/- which is more than 1 crore. Its but obvious that everyone's salary will increase with time and hence the amount which gets added into the PF account will increase every year and hence you can expect a good return during retirement.
Please make sure to check your PF accrued amount from the PF website, where the passbook is updated in a very detailed manner.

Apart from this PF, there is another instrument, which is Public Provident Fund, which one can invest apart from PF. You will need to open a PF account in one of the Banks, I would suggest SBI. You can invest, upto 1,50,000/- each year and all of this can be used against Tax Deductions under Section 80ccc.
The point to be noted here is that , investment in PPF gives you benefit during investment. There is no Tax applicable on the accrued interest and also, no Tax applicable, when you withdraw the money. Thats a huge bonus. Hence in most of my investment talks , I would strong advise investing in PPF for your retirement planning.

However, just like PF, this amount cannot be easily withdrawn. Only after 7 years, you can take a loan against your PPF account. And some part of the money can be withdrawn for any emergency purposes, which are listed.

Hope you will take up the right step in investing and start investing in PF . Thanks for reading.

Friday, March 9, 2018

NPS - Should I Invest in it ?

The National Pension Scheme, or the NPS, which its commonly called, has gained more and more popularity over the past few years, is indeed a very good way to save your money.
For one, its a scheme pushed by the government, but It would still be investing the funds in the different investment avenues, which the traditional government driven initiatives, would keep away from. In short, apart from many debt funds, based on the option one chooses with the NPS partner bank, one can invest in many of the Equity Based Funds.
So, the next question would be, how is it different from investing in Mutual Funds ? More than one, to be precise.
  1. This is meant to be a Retirement Fund
  2. There is Tax Benefits under section 80CCD (80 CCD(1) and 80CCD(2))  while investing the amount.
  3. These Tax Benefits are over and above the Tax Benefits under section 80CCC, which currently(Budget 2017), is pegged at 1.5L only. Mutual Funds investment come under this 1.5 Lakhs investments.

Now coming to the NPS itself, the investment can be done in two forms, under section 80CCD(1) and 80CCD(2), or in layman terms, from Employee and Employer. 
If the investment is done by the Employer, then the maximum investment, that one can do is 10% of your basic salary and  capped at 1.5 Lakhs per annum.  While the Employee's contribution can be a maximum of 50,000/- per annum.
So if your basic salary is 10Lakhs, then under section 80CCD(2) you can invest up to 1 lakh per annum and get tax benefits, while under section 80CCD(1) you can get additional benefits of 50,000/- .
A bit of clarification, on the so called Employer's contribution. Its not that the Employer might be adding further investment, and this might still be taken as a part of your CTC.
Now, coming to the Tax on the Returns from NPS.
The contribution made towards the NPS scheme, could be withdrawn on Retirement or by Surrender of the Policy.  As per the Budget 2016, 40% of the returns from NPS would *not* be taxed. However, as per the Budget 2017, if the entire returns from the NPS be converted into a Annuity Plan in the same year, then there would be no tax applicable at all.
In Summary, those who have to plan for their retirement and still save taxes, this is an excellent way on both the counts. And more so, for those, who have ran out of all further options to save taxes after the section 80CCC is all filled up by your Insurances/ULIPs/Home Loan etc.
Each NPS account will have an unique PRAN Card and that account number will be associated with your PAN and hence it would be likely that only one PRAN account would be applicable per person.

Few Pointers to keep in mind 

  1. Investment in NPS is meant for Saving for Retirement
  2. 50,000/- can be invested on Section 80ccc, above your 1,50,000/- in other instruments. Well, you can also invest the whole 2,00,000/- in NPS.
  3. Apart from the above , you can invest upto 10% of your basic in NPS, capped at maximum of 1,50,000/- per year.
  4. These investments can be converted into an annuity, which can make it tax free on withdrawal. If not, then it will taxed based on your taxable bracket.
  5. This investment instrument is not just for Salaried Class, and can also be availed by those in business or self-employed
  6. The age limit for investing in NPS is from 18 to 65 years of age.

Saturday, April 29, 2017

Clear your debts by part payments

Every one of us, most likely has one or the other type of loan. Those who dont, I must say that, they are indeed blessed
Loan is not a bad thing to have. It gives one the ability to buy something(preferably an asset), at a earlier time, and slowly pay over a period of time.
Though it's a good thing, but at the same time, you need to understand that, it's from  the interest which you pay, which gives banks all the profits and also manage to pay the salaries of all their employees. Not a small amount eh ?
So the earlier you reduce you loan amount, the better for you, from your savings point of view.

Let me give you an example, which will tell you, how much you can save by doing a early part payment.
Assume you have taken a housing loan of 20 lakhs and your monthly EMI is roughly 20,000/-. An EMI will have a principal component as well as an interest component. In the initial years your principal component will be very less, while your interest part very high, and this will change over the years.

So, if you happen to make a part payment of say 25,000/- or 50,000/- it will make a big impact on the number of EMI's which you have to pay, if done in the early years. While the same amounts will not have the same impact in the later years. Nevertheless, its always beneficial, whenever you do the payments, it always helps to reduce to total out go from your accounts

Here is the table below, which shows the EMI for 20 Lakhs for 20 years at 11.75% Interest.
Monthly Installment

Only the first 10 Installments are shown above. But you an see, that even though in the Initial months, you are paying 21674/- as EMI only 2091/- is used to pay up the Principal amount, and a huge amount of 19583/- is used up for the Interest.

So, practically, close to the end of 1st year, if you pay up 25000/- as part payment, close to 10 EMI's worth of Principal, you would be paying in a single transaction. (its an approximation as 10th months principal is 2282/-. and 25000 divided by 2300 will be approx 10.

So technically, the effort required by the next 10 EMI to pay up that 25,000/- has been taken care.
Which means, by paying 25,000/- you have saved up paying 25000 x 10 = 250,000/- ie Two Lakh Fifty thousand. Thats quite a saving and you also end up completing the EMI's earlier :)

So whatever be the case, always try and pay up as much as possible. Try for 25000/- per quarter to pay up and it will help you a lot.

Money saved is also money earned.

If you like this article kindly share with others.

Sunday, April 23, 2017

Tax Planning for New Financial year

April, this is the time, when we need to declare the Tax Declarations which we would be doing in the coming year. Some of us declare few investments and only hope to do them sometime in the year. But not all are able to meet that commitment. Here are a few advices, which I would suggest to use as a guiding tool, rather than for planning.

Lets look at the Simple Tax Investments which we can use.

  1. Upto 2 Lakhs under Section 80 ccc.  In this 2 Lakhs, 50,000/- is only meant to be invested in NPS(National Pension Scheme). 
  2. The Remaining 150,000/- can be invested in Insurance Plans, Mutual Funds , NSC.
  3. From this 150,000, since you would also have been paying PF from the company itself, it would be also considered as an investment. You will need to do it and you dont have a choice. 
  4. If you have a home loan, the Principal from the home loan, will also be considered as a contribution towards the 1.5 Lakhs. 
  5. After subtracting the PF amount which you are paying and the House Loan Principal component, the remaining amount will need to be invested, in other instruments like Term Insurance, ULIP Policies, Tax Savings Mutual Funds, NSC etc.
  6. If you dont have any Insurance Policies, its a good time to start. Maybe smaller amounts is a good start. 
  7. If you dont want to invest in a hurry, then plan to invest in Mutual Funds. So that, that commitment doesnt become a recurring one every year. But make sure, you dont leave any room for saving taxes.
The other Tax Savings, which most of the folks dont do, is the Medical Insurance. You get deduction upto 25,000/- per year under section 80D. Its always good to have your Medical Insurance plan of your own, even if your company provides you with one.

NPS is something, one should start investing, as those in the private sector will not get any pension during their retirement life. Its only your own investments and the PF's which will come to your rescue during your retirement life. 
Out of the 2Lakhs under 80ccc, 50,000/- should be from NPS only. Though you can and should try to invest more. 

House Loan Interest
The principal component of the house loan, will be considered as an investment under section 80ccc, while the Interest  component will be getting full tax exemption upto 2 Lakhs.
Also, those having second homes and given on rent, from April 2017 onwards, the maximum loss one can claim from the house loan interest is also limited to 2 Lakhs, which didnt have any limits until the last year. 

Another exercise one needs to do, at this time of the year is also to get the Home Loan Interest Certificates from your respective banks, as you might need to submit them , while filing your returns, if there is a difference in the amounts, in the Provisional Tax Document and the Tax Certificate. 

If you have any queries, kindly put them in the comments section below.

Tuesday, May 10, 2016

Smaller Savings Add up

Its always the smaller Savings which add up. when I mean small savings, its about putting those smaller amounts in a place, where, it will grow up to be a larger value.

Was reading this article on Quora and I thought that I should be sharing it.

1) Small purchases add up. In the place where I live, a coffee will cost about $4. Drink a coffee every day and you are dropping well over $1,000 a year on your coffee habit. That's the price of a vacation to a foreign country or a couple tailored suits. Make the coffee at home and save BIG!
2) The true cost is not what you paid today, it's what you give up in the future. I can spend $1,000 on coffee this year. Or, I could put that $1K in an S&P index fund and let it sit till I retire. If I could have earned say 8% annual returns and plan to retire 30 years later, my coffee habit this year reduced my retirement by $10,000.
Understand these basic concepts and you'll be able to to become much wealthier by making some simple, small changes to your life.

Friday, April 27, 2012

1 Crore on Retirement

I have been getting some emails from some insurance companies asking me to invest into some of their funds/plans and become a crorepati when you retire.
First, I don't like to rely on insurance companies which sell ULIP only to gain the commissions to give you promises especially for your retirement fund.

The ULIP and mutual funds give the returns only on market conditions. Market goes up, you get a good return and goes down.. you know what that means. This is acceptable, when you can afford to take risks, but wouldn't be the only investment for my retirement plan. I would like to invest a bigger portion in debt funds when it comes to retirement, than on equity funds.

The given ad, said, invest 8000 per month and earn 1 crore. But do these people give guarantee on the returns. The disclaimer is always present there, that the returns are subject to market conditions.

Let's say, you invest 8000 per month in a FD and lets say, you still have 30 years of your working life. A simple FD with a 8% return would give you 11,745,213/-(1 crore 17 lakhs ) Offcourse, we will not always have 8% as the interest , it can come down or go up, but still an average of 8% is quite reliable over a long period of time. A simple investment of 8000 per month can do this wonders, why take the additional risk of market equity.
Nothing stopping you from taking risks, but its all based on your target's you want to achieve for your retirement.

Few examples of FD returns
30 years  5000 per month    73 lakhs after 30 years at 8% compounded annually
25 years  10000 per month   95 lakhs after 25 years at 8% compounded annually
25 years  10000 per month   1.29 Crore after 25 years at 10% compounded annually

FD's are something, which are guaranteed income, and the even in the worst of cases, there is no loss.

Before I conclude, couple of points

  1.  FD's will never be able to make up for Inflation. But it will be a secured amount when you need it.
  2. The interest earned on the FD's are taxable depending upon your tax slab.

Friday, April 6, 2012

Your PF

Every time that you change your company, the HR will give you the document to withdraw the money or transfer it to the next company that you join. And we being we, the urge is to withdraw it, considering the fact that you are so pressed for clearing that long pending credit card bill, which has already absorbed huge amount in the form of 33% interest. Definitely, it makes more sense to clear off the high interest rates debts with these amounts which barely give 9% interest.
But hold on. Though the urge is there to withdraw and I know, almost everyone has immediate needs. But just make sure to keep the money handy for your retired life. Remember, now, you have a source of income and the PF money is meant to take care of you when you dont earn. Please remember that you dont earn a pension like our parents did, when worked for an government organisation. Yes, those are the perks that they enjoy , and we will not be.

So , in short, once you join your new company, please transfer the money to your new PF account in the new company. From what I last remember, the interest will be paid on only one PF account. So if you havent transfered it, there is quite a bit of chance that there will be no accumulation of the interest. But I am not sure, how the PF department finds out that, one has more than one account. Nevertheless, its our job to make sure, we have only one account.

Also, if you still dont have PPF account (Public provident fund), please open one. You can invest there as less as 2000 per year. And that account will earn a good return at the rate of 8 or 9% interest(the rates keep changing). There amounts are exempted from tax under section 80ccc. This is a great way to accumulate the funds for your retirement and also have the freedom to invest as per the comfort level.